On Friday, Jefferies made a significant adjustment to its outlook on Softcat (LON:SCTS) Plc. (SCT:LN) stock, a prominent player in the European technology sector. The firm's analyst has downgraded the rating of Softcat from "Buy" to "Underperform," citing a misalignment between the company's current valuation and its earnings growth prospects. Accompanying this downgrade is a revised price target, now set at GBP14.90, a decrease from the previous target of GBP19.50.
The rationale provided for this change centers on the forecast for the company's earnings before interest and taxes (EBIT) for the fiscal years 2025 and 2026. The analyst notes that the consensus expectations for EBIT growth in these years—ranging between 12% and 13%—exceed Softcat's typical growth targets, which aim for low double-digit growth in gross profits and high single-digit EBIT growth. This optimistic consensus, according to the analyst, may lead to downward pressure on future earnings expectations.
Softcat's current market valuation, which implies an EBIT growth rate of approximately 20% to 25%, stands out as particularly high within the European tech industry. Jefferies suggests that given the forecast risks, this premium valuation appears vulnerable.
To arrive at the new price target, Jefferies employed discounted cash flow (DCF) assumptions aligned with those used for Bytes, another company in the sector. This comparison and alignment have led to the reduction in the price target to 1490p. The firm's analyst emphasized the importance of recalibrating expectations to reflect a more balanced assessment of Softcat's growth trajectory and valuation metrics.
Investors and market watchers will likely monitor Softcat's performance and valuation closely in the wake of this rating change, as the company navigates through the expectations set for the upcoming fiscal years.
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